Base Oils 2014: Oversupply creates buyers' market in China

China’s base oils market is likely to favour buyers this year as added capacity, lack of maintenance shutdowns and increased recycling will keep product in good supply

China’s base oils demand is expected to rise steadily in 2014 as its economy gradually recovers. The country is expected to replace the US as the world’s biggest consumer of lubricants this year. However, an oversupply of Group I and II base oils will hit the Chinese market as a result of new capacities coming on stream and less frequent maintenance at base oils plants this year.

On the demand side, most market players see a positive outlook for Chinese base oils in 2014. Global lubricant demand is expected to grow at a rate of 2.6%/year over the next few years, according to one industry source. China’s lubricant consumption is expected to grow at the same pace as its modest economic growth – anticipated at 7% for 2014.

More product than needed will create a buyers’ market in 2014 in China

Copyright: Rex Features

Demand for vehicle-use lubricants will continue as the growth driver for lube oil consumption in China. A 1m increase in the number of private cars will result in a rise of about 91,000 tonnes in lubricant demand.

Demand for industrial lubricants is likely to continue to be steady over the next one-to-three years as development and investment in heavy industries stagnates.

Meanwhile, the accelerating process of urbanisation in China will push up lubricant consumption. With more of the rural population moving into urban areas, demand for public buses will climb. More buses equipped with gasoline-fuelled engines will be replaced by those with gasoil-fuelled engines, which will lead to rising demand for lubricants.

In addition, the Chinese government will also invest more in the construction of infrastructure facilities, factories and commercial and residential buildings in order to accommodate the rising urban population, which will further boost lubricant consumption in the infrastructure and real estate sectors.

NEGATIVE FACTORSOne negative factor for the demand side is the purchasing restriction on automobile ownership as the country tries to tackle pollution and traffic congestion. Another is the government’s initiatives to increase mineral oil recycling.

China will levy no consumption tax on base oils produced by the recycling of used mineral oils between 1 November 2013 and 31 October 2018, the central government announced on 26 December 2013. The Ministry of Finance and the State Administration of Taxation of China jointly issued a document on supporting resources recycling and environmental taxation, which is aimed at promoting the rational utilisation of resources and environmental protection.

China’s base oil plants running on used mineral oils are mostly located in provinces such as Shandong, Hebei and Fujian and have small production capacities. There were 357 enterprises that qualified for the production of recycled base oils in 2008, with a combined production capacity of around 1m tonnes/year, according to Liu Yanbing, secretary general of China National Resources Recycling Association (CRRA). These companies are also exempt from value-added tax (VAT), says Liu.

China’s development of base oils production from used mineral oils is quite slow and still in its infancy, and many Chinese enterprises can only produce substandard base oils and Group I base oils with poor quality. Nevertheless, the sector will still exert some competition on domestic Group I base oils produced by China’s major oil refiners Sinopec and PetroChina.

MAINTENANCE HOLIDAYSTurning to the supply side, most Group I and Group II base oil plants have no regular maintenance planned for 2014. Many of them changed catalysts and fixed technical problems in 2013 and, as a result, the Chinese base oils market will generally be a buyers’ market this year.

For Group I base oils, the majority of producers have no plans for regular maintenance in 2014. PetroChina subsidiary Dalian Petrochemical will, however, shut its 450,000 tonne/year Group I base oil plant in April; shutdowns normally last around two months.

Meanwhile, among Asian refiners, only CPC Shell has scheduled maintenance – it has a closure at its 250,000 tonne/year Group I base oil plant planned for the end of the year. It is currently only operating one high viscosity line in response to squeezed margins in the refinery. Thus, Group I base oil supplies will be plentiful and even outweigh demand in 2014.

In the Group II base oil market, supplies in the first and fourth quarters of 2014 are expected to be slightly tight in response to the scheduled maintenance at base oil plants. In addition, demand for base oils will peak in March and October because of the oil-change season for lubricants. As a result, Group II prices will be stable to firm in those periods.

Sinopec Jinan shut its 150,000 tonne/year Group II plant at Jinan in Shandong province in late November, following an explosion at a drainage pipe in Qingdao city. The explosion was caused by a leakage from its Dongying-Huangdao crude oil pipeline. The restart date is rumoured to be around February.

At the same time, Sinopec Jingmen shut its 100,000 tonne/year Group II base oils plant at Jingmen in Hubei province on 6 January because of a feedstock shortage and the fact that the unit is about to undergo a routine annual turnaround. A restart date has still not been set.

Also, China National Offshore Oil Corp subsidiary Huizhou Petrochemical will shut its 400,000 tonne/year Group II base oil plant in October, which usually lasts for one month. PetroChina subsidiary Daqing Petrochemical plans to have a two-week turnaround at its 200,000 tonne/year Group II base oil plant.

Taiwan’s Formosa Petrochemical, GS Caltex and S-Oil are all believed to have no routine maintenance planned this year because they have already changed catalysts in 2013.

START-UPS AHEADLooking at new start-ups, Panjin Northern Asphalt, a subsidiary of China North Industries Group Corp, started up a 400,000 tonne/year Group II base oils plant at Panjin in Liaoning province in November 2013. Meanwhile, Sinopec Beijing Yanshan has delayed the start-up of its 240,000 tonne/year Group II plant in Beijing municipality to March because of a feedstock supply shortage. According to its parent company, Sinopec Maoming’s 250,000 tonne/year Group II base oils plant in Guangdong province will be put into production at the end of the year.

As for Group III base oils, Chinese domestic prices will be flat this year. Although the demand for Group III base oils will strengthen modestly in 2014, Chinese refineries have no plans to produce the new Group III base oils in 2014 as a result of technological limits. Thus, China will still be a net importer of Group III base oils. Moreover, with the continuous price drop of Chinese domestic Group III base oils, the price bubble will disappear and prices will be steady.

To sum up, base oil demand in the Chinese domestic market will grow slightly because of the gradual recovery of the industrial and automotive sectors in 2014. However, with less routine maintenance and a string of new start-ups of Group II base oil plants, Chinese domestic prices are less likely to remain firm throughout the year.

Whitney Shi is a base oils industry analyst at C1 Energy, part of ICIS China, and is based in the Shanghai, China, office of ICIS